Financial markets HATE uncertainty. It can generate enormous tidal waves of volatility in stock markets and have investors, professional and novice alike, running for the hills with their fistfuls of hurriedly bailed-out cash – or at least towards the so-called safe-haven of gold reserves. And when it comes to uncertainty – political, economic or otherwise – it doesn’t come much bigger than the snap General Election on June 8th, as has been instigated by UK Prime Minister Theresa May.
While horror stories of a tumbling FTSE dominate the headlines, you might be worried about the impacts on your pension pot or equity portfolio. Well, don’t flap just yet. These are actually quite familiar waters we’re about to traverse and we will do so safely and serenely, I assure you. Let me explain why.
As soon as Mrs May announced her decision to hold a Parliamentary vote on a snap General Election, stock markets in the UK plunged, with the FTSE 100 finishing the day 2.5% down. The heavy dose of uncertainty she had syringed into the financial landscape had got investors on edge, which in turn causes them to re-evaluate their investment strategies and ultimately adopt a more cautious approach. For now!
They sell their investments, especially the more risky equity-based ones, and hold it all as cash or filter it into secure, low-rate long-term bonds – or, as I say, gold. This causes demand to collapse and, therefore, company stock valuations to slide. But it’s only because of this new wave of uncertainty, nothing more. And it’s just temporary. When it comes to stock markets, no news is bad news, and any news is good news (almost).
Sterling and stocks
Meanwhile, that same day May shocked us with her announcement outside No.10, the value of the Great British Pound bounced upwards 2.2%. The two major financial factors at play here – Sterling and big company stocks – are very tightly linked. A falling Pound often spells good news for large multi-national firms based in the UK, such as those on the FTSE 100, because so much of their revenue and profit actually comes from sales made abroad. This profit is then converted back into Pounds in the UK at better rates than before, so they’re effectively getting more pounds for their dollars, their euros, their rand, rupees, renminbi and so on.
Since the Brexit vote last summer, Sterling has struggled badly. Investors suddenly didn’t like the look of the UK as an economic region to pile their money into, which tugged on the value of the Pound compared to other major currencies. But it was a huge boost to the stock prices of the biggest global firms in the UK because of the higher value they found when changing those international profits back into British money.
If you invest in a diverse portfolio, and on a global scale, these potential ‘issues’ become merely nuances. But if you have all your money invested in a selection of company stocks you could get badly burned. Make sure your investments are diversified!
Polling day – again!
You could argue that this isn’t actually a General Election at all. You might rather call it a ‘Brexit Election’. Many pundits see it as a bizarre precursor to the impending Brexit negotiations – or even a second Brexit vote, which will either give the government great confidence to go into battle with the EU member states on their terms and with great gusto – or, erm, not!
History tells us that the markets swing in time to the pre-Election opinion polls. We can expect to see more volatility in the lead up to the June 8th UK General Election and, if the pendulum suggests a hefty Tory majority, it will likely strengthen the value of Sterling and down-weight stock prices on the FTSE 100.
Bring the noise
However, all this doesn’t necessarily predict the post-Election scenario. We have two good recent examples. Firstly, the Referendum last summer. Many commentators expected a significant crash in markets in the event of a win for the ‘Leave’ vote. So far, we’ve seen anything but. Secondly, the US Election. The surprise Trump victory initially dented investor confidence and spooked the struggling US stock markets but they very quickly rallied and have been steadily rising ever since.
So in the run up to polling day, don’t be hoodwinked by the alarmist press or confused by mass storm of punditry noise. Ignore them. Put the ear-mufflers on. And when it comes to your investments, DOING NOTHING might well be your best approach. Hold a long-term passive investment strategy and you won’t go far wrong in my view.
These are typical times, when the nervous get nervous and can lose money badly, while the informed stay rock solid and breeze over the speed-bumps in relative carefree comfort.